DEMO's desk...: Dividend-Paying Equities as investments

The long-term case for dividend-paying equities continues to be compelling. Here are some reasons to have confidence in the value of dividends within your wealth management strategy:

An integral component of long-term returns. Dividend-paying companies represent a significant part of long-term returns within the equity market. Over a period of 25 years from 1991 to 2016, the compounding effect of dividends on the S&P/TSX Composite Index has been profound-with reinvested dividends providing around 45 percent of total returns. On this basis, an investment of $1,000 would have yielded around $4,350 today on the index alone but around $7,800 if dividends were reinvested.1

May provide a reliable and steady cash flow stream that can be used for income, or reinvested. Today’s persistently low interest rates and slower growth have made it challenging for investors to find income-generating Investments. Dividend-paying equities continue to provide a steady stream of income to an investor. Many quality companies will consistently pay dividends year after year because it is seen as a sign of economic health (i.e., there is excess cash with which to pay shareholders).

Historically have provided greater protection in bear markets. The dividend yield of a stock can provide a degree of downside protection. The dividend yield reduces the potential impact of a decline in share price during economic downturns. Studies have also shown that dividend-paying stocks have proved to be a useful buffer when investors experience high degrees of volatility.2

A tax-efficient means of investing. Remember that not all income sources are treated equally by the tax authorities. Canadian dividends are potentially one of the lowest-taxed sources of investment income in Canada, when compared to interest income or foreign income. This is due to the non-refundable tax credit applicable to most “eligible dividends”, generally dividends issued by Canadian public companies.

Consider that for each dollar of dividend income received, an Ontario resident taxed at the highest marginal tax rate would keep about 14 cents more Compared to a dollar of fully taxable income (based on an assumed 53.53 percent marginal tax rate and a 39.34 percent effective tax rate for eligible dividends).

The potential for dividend growth. Don’t overlook the potential impact of dividend growth. The S&P/TSX Composite Index dividend has had an annualized growth rate of 5.2 percent over the past 25 years.3 And, consider the extreme case of Johnson and Johnson, a Company that has increased it, dividend payout for 54 consecutive years. Shares of Johnson and Johnson purchased in 1972 (and held) would have had dividend returns of approximately 3,300 percent today!4

In short, we continue to advocate the benefits of quality dividend-paying stocks as part of your wealth and investment plan.